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3 SOX 404 Background Due to the scandals in corporate financial reporting, Congress enacted in 2002, the Sarbanes Oxley Act (“SOX”). The Security Exchange Commission oversees the compliance by publicly traded companies to the Act. The Public Companies Accounting Oversight Board (“PCAOB”) drives the compliance. SOX Section 404 rules require each annual report to contain an internal control report which shall state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and contain an assessment of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. Filing due dates: Fiscal years ended on or after November 15, 2004 for accelerated filers (ie., market capitalization in excess of $75mm) Fiscal years ended on or after July 15, 2006 for non-accelerated filers.

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4 SOX 404 Goals  no material weaknesses that must be reported at the registrant level by either management or the by external auditor;  no significant deficiencies that must be reported at the registrant level by either management or the external auditor to the Audit Committee of the Board of Directors; and  no material misstatements of the company’s financial statements The goals of a SOX 404 program are to ensure that enterprise internal controls are of such quality that there will be:

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6 In order to make the assertion, the client must:  Document and evaluate the design of controls  Evaluate the operating effectiveness of significant controls  Identify significant deficiencies or material weaknesses  Document the results of the evaluation  Communicate findings (e.g., significant deficiencies and material weaknesses) to the independent auditor Note: Absence of sufficient evidence to support the Company’s assessment may constitute a significant deficiency that results in a report qualification by the external auditors. SOX 404 Overview - Assertions

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9 The control conscience of an organization. The “tone at the top” The evaluation of internal and external factors that impact an organization’s performance The policies and procedures that help ensure that actions identified to manage risk are executed and timely The process which ensures that relevant information is identified and communicated in a timely manner The process to determine whether internal control is adequately designed, executed, effective and adaptive COSO - Internal Control Framework Components Objectives

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10 Non-profit (country clubs) and non-publicly traded (hotels) companies are not required to comply with SOX 404 requirements. Reasons to care: Why Do You Really Care About SOX 404? Board members, who are responsible for the establishment and maintenance of good corporate governance –ALL Financing sources (banks and investors) want assurance that the financial statements are not misrepresented – ALL Owners want assurance that the financial statements are not misrepresented – Hotels Risk of membership loss due to fraudulent practices disclosed to the public – Country Clubs If acquired by a publicly traded company, SOX 404 compliance is required - Hotels

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11 Things You Can Do Steps to take to enhance your internal controls: Establishment of an audit committee to provide financial reporting and internal control expertise, along with oversight on such matters Establish a “Whistle-Blower” policy to provide the means and safeguards to those who identify fraudulent practices Assess the risk associated with the processes that make-up your organization (ie., sales/revenue, cash, accounts receivable, fixed assets, accounts payable, payroll, etc.) For high risk areas and processes ask yourself, “What Could Go Wrong” and address the answers to the question (ie., segregation of duties) Reference List: http://www.aicpa.org/audcommctr/homepage.html http://www.pcaobus.org http://www.sec.gov/rules/pcaob.html